Parker Hannifin Q1 2027 Earnings Call Transcript

Parker Hannifin (NYSE:PH) reported first-quarter financial results on Thursday. The transcript from the company’s first-quarter earnings call has been provided below.

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View the webcast at https://event.on24.com/wcc/r/5521808/72499FBCA17C743118F3DEDF7392BA4E

Summary

Parker Hannifin Corporation reported a record Q1 FY27 performance with an 18% increase in sales to $6 billion, 11.5% organic growth, and a 23% rise in adjusted EPS to $8.90.

The acquisition of Filtration Group Corporation was completed, adding significant backlog and contributing to a $1.85 billion sales guidance for FY27.

The company raised its FY27 guidance, expecting a 9% organic growth at the midpoint and adjusted EPS of $36.85, bolstered by strong performance across all segments.

Strategic initiatives include leveraging the Parker Integration Playbook for smooth integration of Filtration Group, focusing on safety, and executing the WIN strategy to drive operational efficiency.

Management highlighted strong demand in Aerospace and Industrial segments, with significant growth in commercial aftermarket and robust order book across geographies.

Full Transcript

OPERATOR

Good morning everyone. Welcome to Parker Hannifin Corporation’s Fiscal 2027 First Quarter Earnings Conference Call and webcast. At this time, all participants are in a listen-only mode. After the prepared remarks, there will be a question-and-answer session. To ask a question during this period, you will need to press star 1 on your telephone keypad. If you would like to remove yourself from the queue, please press star 2. Please be advised that today’s conference is being recorded.

And lastly, if you should need operator assistance today, please press star zero. I would now like to turn the call over to our host, Mr. Todd Leombruno, Chief Financial Officer. Please go ahead, sir.

Todd Leombruno (Chief Financial Officer)

Thank you so much, Bo. Good morning everyone, and welcome to Parker’s Fiscal Year 2027 first quarter earnings release webcast. This is Todd Leombruno, Chief Financial Officer, speaking, and as usual with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. As always, we appreciate your interest in Parker and we thank you all for joining us today. On Slide 2, we’re going to address our disclosures on forward-looking projections and non-GAAP financial measures. The items we have listed here could cause actual results to vary from what we have forecasted in our press release. This presentation and reconciliations for all the non-GAAP measures were released this morning and are available under the investor section on our website at parker.com. Today we have Jenny starting with an overview of our record FY27 first quarter performance, and she’s also going to provide some details on the recently completed acquisition of the Filtration Group Corporation.

Following Jenny, I will go a little more in depth on the details for our first quarter financial results, and then we’re both going to give a little color on the increase to our FY27 full-year guide that we increased this morning. We will conclude the call with the normal question-and-answer session, and we will try to address as many questions as we possibly can. So now, if I could move your attention to Slide 3, Jenny, I’ll turn it over to you.

Jennifer Parmentier (Chief Executive Officer)

Thank you, Todd, and thank you to everyone for attending the call today. Our global teams delivered impressive first quarter performance. We achieved top quartile safety performance with a 9% reduction in our recordable incident rate. Safety is our top priority every day, and we remain focused on being the safest industrial company in the world. Q1 sales increased 18% to a record $6 billion. Organic growth accelerated to 11.5% and adjusted segment operating margin expanded 120 basis points to a record 28.6%.

Adjusted earnings per share increased 23% to a record $8.90. This marks the first quarter we’ve delivered double-digit organic sales growth in over three years, and in the quarter we completed the acquisition of Filtration Group Corporation, continuing our track record of disciplined capital deployment to compound performance. I’d like to thank our team members around the world for a great start to fiscal year 2027. Moving to Slide 4, we are experiencing increased demand across our key market verticals. Demand is broad-based, and rolling 12-month order rates increased to 13% this quarter. This broad-based strength is evidenced by our backlog, which continues to climb higher, setting a new record of $13.7 billion in Q1, and Filtration Group also contributed to this increase in backlog. Parker’s portfolio is profoundly different today than it was 10 years ago when we began our portfolio transformation.

Our portfolio has been shaped by our Strategic Positioning Initiative and the WIN strategy, and has been transformed by acquisitions. Acquisitions have more than doubled the size of our Aerospace and Engineered Materials businesses, and we have more than tripled the size of our Filtration business. This is clearly a different Parker—one with greater visibility and backlog, resulting in more consistent growth. Slide 5, please. We’ve been looking forward to welcoming the very talented Filtration Group team members to Parker ever since we announced the transaction nearly one year ago. We were thrilled to complete the transaction in Q1 and continue our long-standing practice for a Parker leader to personally welcome the new team at every location. This slide shows pictures from just a few of our day-one events held around the world welcoming the Filtration Group team to Parker.

This is a great day for all of us, and we are excited to have Filtration Group in the Parker portfolio. I’m on Slide 6. Filtration Group brings a diverse portfolio with strong brands, material science capabilities, highly engineered products, embedded application engineers, and multiple R&D centers. Filtration Group has a global presence with sales split approximately 60% North America and 40% international, and they have a robust aftermarket business, increasing Parker’s overall Filtration aftermarket sales by 500 basis points. This acquisition enhances and expands our exposure in markets we know well, including life sciences, HVAC and industrial, and transportation.

Within life sciences, we have solutions for medical, diagnostic, and test applications that include consumable separation technologies, pharmaceutical protection, special chemistry, and material science solutions. In HVAC and refrigeration, we’re adding complementary products and advanced media capabilities that ensure indoor air quality in places like hospitals, schools, museums, and airports. Moving to in-plant and industrial, we’re adding proprietary media for liquid, air, and gas filtration, increasing safety and productivity.

And within transportation, Filtration Group brings on-vehicle filters and desiccants engineered to an application, increasing cleanliness and efficiency. With this acquisition, we are creating one of the largest industrial filtration businesses in the world with approximately $5 billion in annual revenue. Much like our previous acquisitions, this is highly complementary, brings new capabilities in existing applications as well as near adjacencies, thus expanding our addressable market and opportunities to create value for customers globally.

Moving to Slide 7, our dedicated integration team is leveraging the Parker Integration Playbook. With Filtration Group, we have a proven process and one that we continuously improve with each acquisition. We know from experience that cultural alignment is key to a successful integration, and we see this once again with the combination of Parker and Filtration. We’re currently focused on the first pillar of the WIN strategy—Engaged People. In less than a quarter, our teams have already begun Kaizen events focused on safety improvements.

This is the first step in building a culture of Kaizen that will later drive lead time reductions that drive customer experience and increase productivity. The chart on the right shows, for the first time, our expected cumulative cost synergies by year. Our fiscal year 27 guidance now includes Filtration Group and $40 million of synergies this fiscal year. Acquisition integration is a core competency here at Parker, and we are confident in delivering $220 million of cost synergies as we target taking Filtration Group’s adjusted margin to 30%.

Now on Slide 9. Many of you on the call today have seen this slide before—Why We WIN. First, the WIN strategy is our business system. We have a decentralized operating structure—divisions run by general managers with full P&L responsibility, acting like owners close to their customers and executing the WIN strategy every day. Next, we have innovative products to solve customer problems, 85% covered by intellectual property. Our application engineers provide the expertise that allows us to have a competitive advantage with our interconnected technologies that provide efficient solutions for our customers.

Two-thirds of our revenue comes from customers who buy four or more technologies. And finally, our distribution network is the best in the world. It is truly an extension of our engineering teams, providing solutions to all those small- to mid-sized OEMs that are participating in capital spending and investments. These partners are experts at applying our interconnected technologies. Todd, I’ll pass it over to you for some first quarter highlights.

Todd Leombruno (Chief Financial Officer)

Thank you, Jenny. You know we always talk about finishing strong. Well, this is a quarter where we started the year strong. As Jay said. I’m on slide 10 and I’m just going to go through a real quick review of the first quarter results. It was a strong quarter. Double-digit sales growth resulting in strong margin expansion and 23% EPS growth. Sales were up 18% versus prior year. We reached $6 billion for the first time in the history of the company.

Organic growth, as Jenny mentioned, was 11.5%. Acquisitions all in added 7%. Most of that was from the Filtration Group Corporation. But we do have one last partial quarter of Curtis sales in there that totaled to 7% for all acquisitions. Segment operating margins are up 120 basis points from the prior year. Finished at 28.6%. That obviously is a record. Adjusted EBITDA margin was also a record at 28.5%. That’s also up 120 basis points from prior year.

And adjusted net income was a little bit over a billion dollars. $1.1 billion, which is 18.9% return on sales. And that’s how we get to $8.90 in adjusted earnings per share. That is up 23% versus prior. Like I said, it was just a really strong start. It’s great to start the year with double-digit organic growth and 23% EPS growth. Really glad to see that on slide 11. This is the walk. You can see it was just a really, excuse me, clean quarter. Essentially all of our EPS growth came from strength across our operations. Segment operating income increased by $327 million. That happens to also be 23%. That added nearly $2 of EPS to our EPS growth for the quarter. Lower shares outstanding was favorable by $0.04. Income tax was also slightly favorable, just a penny, and interest expense as expected was higher. That is really related to the newly issued debt that we took out to acquire the Filtration Group.

G&A and other was negative 8 and that was really driven by higher market-based benefits. Nothing really out of the ordinary there, and that’s really how we get the $8.90 in adjusted earnings per share. So really just a great quarter. Thanks to our teams for converting 11.5% organic growth into 23% EPS growth. Just a great operating performance across the company. Now if we move to slide 12 and look at segment performance, rolling orders on a 12-month basis accelerated for the company. The plus 13% versus prior year, and as you can see there’s double-digit growth across all reported business on the 12/12 order report. Organic growth, like I said, was 11.5%. That did exceed our guide. We were guiding 8%. Margins are up 120 basis points and that is a new record. If we look at the North American businesses, sales are up 20%.

That is a record $2.4 billion. Organic growth in North America was 9.4%. We saw positive growth across all market verticals and that includes distribution. Margins were up 60 basis points versus prior. That finished at a record 27.6% for the North American businesses. And we continue to see margin expansion from executing the WIN Strategy and really leveraging higher productivity on that sales volume. Orders in North America also increased 200 basis points to 11% compared to the prior year.

And as Jenny said, strength across all market verticals in the North American business. It’s just a great way to start the year for North America. If we slide into the Diversified Industrial International businesses. What a quarter here. Sales were a record $1.7 billion. That’s up 22% versus prior year. Organic growth was 11.6%. And that was really led by outstanding growth in our Asia Pacific business. Organic growth in Asia Pacific was 23.4%. It was also great to see the EMEA region go positive at plus 4%. And as you can see, Latin America is just a slight drag at minus 1%. Margins here are the standout: 270 basis points of margin expansion versus prior year.

The 27.7% is a record for the international businesses. Really seeing results from a lot of restructuring activities over the past year or two, some growth from new business wins, and obviously executing the WIN Strategy over and over and over again. On the order front, international orders increased 400 basis points to 14% with sequential increases in both Asia Pacific and EMEA. It was a record quarter across multiple metrics from our international team and they did a great job starting the year.

So thanks to all of our international team members. Moving over to Aerospace, just another exceptional quarter of double-digit organic growth. Sales were a record at $1.9 billion. That’s up 14% versus prior year. All 14% of that is organic and really strength across both the OEM and aftermarket businesses. You look at margins, they expanded margins 70 basis points versus prior year. They also achieved a new record of 30.7%. That margin performance is really a result of great productivity, those higher volumes, and stronger than expected commercial aftermarket growth.

Order rates continue to be elevated in Aerospace at +14, and we could continue to see strong mid-teen commercial aftermarket order growth. Another great performance from our Aerospace team. Thank you. On slide 13 we talk about cash flow. Cash flow from operations was $752 million. That’s 12.6% of sales. Free cash flow came in at $643 million. That’s 10.7% of sales. That is slightly lower than last year. All of it is related to just bringing in the Filtration Group acquisition. If you remember last week our board approved our quarterly dividend of $2 per share. That is the company’s 306th consecutive quarterly dividend. And on cash flow we are committed to achieving 100% conversion for the year.

If you remember, our cash flow is second-half weighted. We issued the new debt this quarter to acquire the Filtration Group. Those interest rates on average are just slightly over four and a half percent and that pushed our net debt to adjusted EBITDA to just 2.7. So those are the details on Q1. Jenny, I’ll turn it over to you and we can start.

Jennifer Parmentier (Chief Executive Officer)

Thank you, Todd. I’m on slide 15. Our fiscal year 27 organic growth forecast by key market vertical: as previously mentioned, with strong and broad-based demand, we are raising our midpoint organic growth guidance 200 basis points from 7% to 9%. For Aerospace and Defense, our largest vertical, we are raising guidance to approximately 10% organic growth, commercial aftermarket orders accelerated and OEM continued strong. We are also raising our growth outlook for in-plant and industrial to high single-digit growth.

We continue to see demand broaden and strong orders from our distributors. For our transportation vertical, we now forecast high single-digit growth led by continued strength in heavy-duty truck which has been driven by production rate increases. Moving to off-highway, we are guiding mid-single-digit growth. We see continued strong non-residential growth driving construction. Mining strength continues as well which is supported by commodity prices. We also expect mid-single-digit growth for energy. We see sustained growth from our businesses supporting gas turbine power generation while we are still expecting oil and gas to be flat this year. Lastly, we are guiding mid-single-digit growth in HVAC and refrigeration.

This growth is led by commercial HVAC followed by refrigeration. So in summary we are raising the organic growth forecast for our three largest market verticals and still expect positive sales growth across all market verticals resulting in an organic growth forecast of 9% at the midpoint. I’ll hand it back to Todd to share more details on guidance.

Todd Leombruno (Chief Financial Officer)

Thanks, Jenny. I’m on slide 16 and, as Jenny said, we are raising our full-year guidance. That’s obviously based off a strong performance we had in Q1, the robust order levels, and then of course including the Filtration Group in our numbers. On reported sales, we’re increasing the range of growth to 16% to 19%, or roughly 17.5% at the midpoint. Specifically for the Filtration Group, we are including $1.85 billion of sales to the guide for FY27. That’s obviously a stub year.

That’s roughly 10 and a half months of ownership. If you take that $1.85 plus the little bit that’s left over from Curtis, acquisitions will account for roughly 9% of the sales change. Currency is really just a slight drag at 0.5% and that is based on September 30 spot rates. Jenny mentioned this, but we are increasing organic growth to a range of 7.5% to 10.5%. That’s 9% at the midpoint. Aerospace organic growth, we are increasing that 150 basis points to now 10% at the midpoint.

The Industrial North American businesses’ organic growth is being raised by also 150 basis points to 8% at the midpoint. And the Industrial International businesses are being raised by 400 basis points to 9.5% organic growth at the midpoint. For the full year, adjusted segment margins are expected to increase by 20 basis points versus the prior guide. That would go to 27.9% for the year. And that includes raises in all three reported businesses. That would be a 60 basis points increase versus prior year all in, and that would include incorporating the Filtration Group into Parker Hannifin numbers. Just a few items to note. Corporate G&A is just up slightly by $10 million. It was 200; we now expect it to be 210. Other expense is down by $10 million. It was 100; now we expect it to be 90. And interest expense has been increased. This is all really related to the Filtration Group debt. We now expect $690 million of interest for the year; previously that was 340 without the Filtration Group acquisition. And really no change to tax rate. 22.5% tax rate. Adjusted EPS has been raised to $36.85, which I will break down a little bit further in the next slide.

The range on that is plus or minus $0.40. And the split is, as usual, 48% first half, 52% second half. And as I mentioned before, we are also raising our free cash flow guidance to a range of $3.5 billion to $4.0 billion. That is $3.75 billion at the midpoint. And conversion will be approximately 100% for the year. If we look specifically at Q2, reported sales are forecasted to be nearly $6.2 billion. That is a 19.5% increase versus prior. Organic growth we expect to be about 10% for Q2. For adjusted segment operating margins we are forecasting 27.6%. That is all in, and adjusted EPS is now expected to be $8.82 for the quarter.

On slide 17 we provided this just to kind of show the increase, just with a couple moving pieces with Filtration Group coming in. You can see our previous guidance here was $34.75 for the year. We are increasing that to $36.85. I just want to point out that $1.70 of that increase is coming from increased segment operating income dollars based on the higher organic growth and great incrementals in our legacy business. Just a great quarter to start the year and we expect that to continue throughout the year.

For Filtration Group and FY27 we expect this to be adjusted EPS accretive of $0.50. That is for the first 10 and a half months of ownership there was really no impact and operating margin was offset by interest expense. But for the next three quarters we’re expecting $0.50 of accretion. That includes the $40 million of synergies that Jenny mentioned earlier. And then lastly just corporate interest and other is just a slight bit higher, $0.10 higher.

And that brings the total raise for the year to $2.10, or 6%, from what we just initiated three months ago. As usual, we’ve got additional guidance details in the appendix. Just in summary, FY27 is off to a fantastic start. We’re excited to welcome the Filtration Group team members to Parker Hannifin. And with that, Jenny, I’ll hand it back to you.

Jennifer Parmentier (Chief Executive Officer)

Thanks, Todd. I’m on Slide 19 today. We are excited to announce our 2027 investor meeting on May 13, 2027. Similar to our last investor meeting three years ago, this meeting will be in person and webcast from New York City. Please save the date and we look forward to sharing more details. Moving to our final slide, a reminder of what drives Parker Hannifin: safety, engagement and ownership are the foundation of our culture. It is our team members living up to our purpose every day that drives top quartile performance and allows us to be great generators and deployers of cash.

Todd Leombruno (Chief Financial Officer)

Okay, Bo, we are ready for the Q and A portion of the call.

OPERATOR

Certainly. Thank you. Ladies and gentlemen, at this time, if you do have any questions, please press star one. Again, if you do find your question has been addressed, you may remove yourself from the queue by pressing star two. Additionally, to get to as many questions as time permits, we do ask that you please limit yourself to one question and one follow up. We’ll go first this morning to Andrew Oban of Bank of America.

Andrew Oban (Analyst at Bank of America)

Yes, good morning guys. Just a question, Jenny. Congratulations for, I think, what seems like eternity, where the team was hoping for the industrial recovery that sort of never seemed to come. It does seem, finally seems to be here. What has changed that, you know, we’ve now seen to have like two quarters of recovery? And how much visibility and comfort do you have going forward? And obviously you’ve raised the guide, but maybe expand a little bit.

Thank you.

Jennifer Parmentier (Chief Executive Officer)

Good morning, Andrew, and thank you. Yeah, I feel like I’ve been saying positive sentiment and gradual recovery for quite some time and obviously in Q1 what we saw was a broadening recovery across all the markets. I would tell you that it’s been robust electronics and semiconductors growth, double-digit growth. We’ve been able to raise in plant and transportation market verticals. Obviously it’s just really been great in all aspects of the markets that we raise.

So I think that it’s just been that the orders that we’ve seen and the positive sentiment has turned into some momentum here in shipments and increased orders as demonstrated through the quarter. I would tell you that there’s nothing that we see right now that would cause us to be concerned about the outlook. Obviously we’ve raised the guide here. We feel confident in this guide and we’re real pleased with the orders and how the team executed throughout the quarter.

We’ve been talking about all the work we do, no matter what’s going on. And the volume really turned into some nice bottom-line performance.

Andrew Oban (Analyst at Bank of America)

Yeah, great to hear. And maybe a follow up, you highlighted that in aerospace commercial. Aftermarket was a positive surprise. I know a lot of concerns about that starting in the summer maybe, you know, clearly you talk to your customers. What’s driving the upside there? Thank you.

Jennifer Parmentier (Chief Executive Officer)

Yeah, I mean we saw double-digit growth. We saw +14 in both OEM and aftermarket. It was really the second highest quarter of order bookings for us ever. And we do expect this strong demand to continue. So we’re not seeing a lot of retiring aircraft. Right. So aftermarket continues to be strong.

Andrew Oban (Analyst at Bank of America)

Thank you very much.

OPERATOR

We’ll go next now to Mircea Dobre with Baird.

Mircea Dobre (Analyst at Baird)

Yeah. Thank you. Good morning everyone. Appreciate all the commentary on growth and orders. Things seem to be going well, but, you know, just sort of acknowledging what’s going on in the capital markets here, especially post election. There’s obviously concerns about the AI infrastructure build out and I’m not really asking you to forecast how that’s going to go because who knows, but really can you help us better understand what your exposure is as you kind of looking at your business?

Because you obviously have some direct exposure, but there’s also probably some indirect exposure. So as you sort of think about this vertical and the risk that that poses on a go forward basis, it’d be great to hear your thoughts. And specifically in your Asia business where we’ve seen really very, very strong growth. How much of that do you think is related to this, to this particular vertical?

Jennifer Parmentier (Chief Executive Officer)

So just a couple points. So data centers does continue to be a high growth driver for us with double-digit growth in the quarter. We’re continuing to get business in this space and orders and backlog are strong. We have nice exposure and growth, but this is not yet large enough for its own vertical. We finished the fiscal year with data centers making up approximately 1.5% of Parker sales. So this is a great interconnected technology story from all the products that have been in the Parker portfolio for quite some time and we are working with industry leaders.

We have the ability to provide the liquid cooling systems and subsystem components and the Asia Pacific orders are strong in electronics and semicon and that was just a really strong area for the quarter. So as I previously mentioned, we feel good about the orders that are out there and we think this is going to continue to be a growth area but again not quite a market vertical for us.

Mircea Dobre (Analyst at Baird)

That’s helpful. And then my follow up just to maybe double click on your comments on commercial aftermarket. If you were to kind of think about it by region and think about the Middle East specifically, I’m wondering two things, how that specific region has progressed or gone. And, you know, is there potential for some sort of a catch up if maybe conditions in the Middle East change sometime in 2027?

Jennifer Parmentier (Chief Executive Officer)

You know, I think commercial aftermarket has been strong and it continues to be strong. So I wouldn’t note any dip related to anything that we saw with that conflict. You know, we’re raising our guide to high single-digit growth for fiscal year 27. So, you know, strong orders in Q1. You know, as I mentioned before, we’re just not seeing a lot of the aircraft retiring. So that aging fleet is driving the growth. But I wouldn’t say that it went down enough to say there was a reaction to anything going on and obviously borders and communication.

Mircea Dobre (Analyst at Baird)

All right, I’ll leave it there. Thank you.

Jennifer Parmentier (Chief Executive Officer)

Thanks, Mircea.

OPERATOR

We’ll go next now to David Raso with Evercore ISI.

David Raso (Analyst at Evercore ISI)

Hi. Thank you. I was curious if we can dive into the international guide, the 400 bps increase, which geographies drove that. And obviously if you can help us a bit, how you think about the geography guide within the, you know, the total international organic and also the margins, they’re obviously very high in the first quarter and while you raised the margin guide, they’re still lower than the first quarter. Just curious how you’re thinking about that, why the first quarter would be that much higher than the full year guide.

Thank you.

Jennifer Parmentier (Chief Executive Officer)

All right, well I’ll dive into what’s going on with the international guide for you. So full year organic growth is now 9.5%. As Todd said, that’s a large increase to the initial guide and Q2 guided is approximately 11%. So in EMEA we have guidance at low single-digit to mid single-digit growth for the year. That’s really mixed market conditions. They have strong growth in energy, mining and defense and what we see as a gradual recovery in heavy duty truck and construction.

In Asia Pacific this has been very strong. We’re raising guidance to mid-teens organic growth, this was previously high single-digit, and we’re really seeing continued strong electronics and semiconductor demand. In-plant orders and shipments progressed. In Q1 we saw double-digit distribution growth and we’re seeing the orders and the shipments continue to progress and then mining and energy strength continues in Asia Pacific. Latin America guidance is at low single-digit organic growth and we’re still seeing a broad-based softness, you know, across that region.

Todd Leombruno (Chief Financial Officer)

Hey David, this is Todd. I would just add a little bit, you know, Q1 was stellar, absolutely stellar. And if you look at what we’re doing, we have increased the margins really for all businesses, North America, International and Aerospace for the remainder of the year. We did have Filtration Group for basically a month and a half in Q1; we’re obviously going to have it for three quarters in Q2. Those jumping-off margins are lower than our existing businesses.

So there’s a little bit of a drag there until those synergies really start rolling in there. But if you look at incrementals outside of all of that, you know we are high 30s, low 40s on incrementals in the guide here. So, you know, we feel like we’re being pretty aggressive here on the forward outlook. Just Q1 was just stellar.

David Raso (Analyst at Evercore ISI)

And a quick follow up to the meeting. I know it’s many months out, but can you give us a little framework of what prompted calling the meeting and how we should think about. Obviously things are operating pretty well right now. Just curious the reason behind the meeting. We’re always happy to meet with you, but just curious what we should expect broadly speaking and why we called the meeting.

Jennifer Parmentier (Chief Executive Officer)

Well, we usually in the past have done a meeting every two years. This will be three years and we expect that we’re going to be able to share some information with you and some news with you. But it is a ways out yet. So we’re really not in a position today to talk too much about the details of that meeting.

David Raso (Analyst at Evercore ISI)

All right, thank you.

Jennifer Parmentier (Chief Executive Officer)

Thanks, David.

OPERATOR

We’ll go next now to Jamie Cook with Truist Securities.

Jamie Cook (Analyst at Truist Securities)

Good morning and congratulations on another nice quarter. I guess just two questions. One just given Filtration Group is closed and we understand what the implied guide is for 2027. But can you just give us an update on how that business had been performing in terms of organic growth, margins, and then I guess any incremental insights you have on potential upside to synergies. And then my second question, Jenny, just relates to, you know, obviously industrial demand is very strong. Everyone’s very—we’re seeing that in your numbers. I think people are questioning sort of the durability of the cycle. So in an environment where, you know, potentially industrial demand tempers, how do you think about your ability to, in a less robust market, achieve the 4 to 6% organic growth that you target? Just given some of the changes in your portfolio with M&A, you know, and portfolio more positioned towards secular growth.

Just your confidence in the four to six assuming doomsday and industrial demand tempers. Thank you.

Jennifer Parmentier (Chief Executive Officer)

Okay, Jamie, so starting out with Filtration Group, their Q1 performance was what we had expected. Historically they’ve performed at a positive mid-single-digit growth CAGR. Life science business is one of their fastest growing markets right now. As Todd said, the guide includes $1.85 billion of sales and Q1 actual was $285 million. We expect this to be accretive, as Todd said, the ten and a half months, and accretion of 50 cents. So this is a good business.

It’s a business with complementary technologies to what we have, markets that we know, and we expect that this is going to be a good growth business nicely, especially with the additional 500 basis points of aftermarket. We feel very confident in the $220 million in synergies—that’s 11%, $40 million for this fiscal year. The integration team has been working very hard. They were planning ahead of the close and they’ve worked very closely with Filtration Group.

And as I mentioned, Kaizen events are in full swing and we really have had success in the past by focusing on that first pillar of the Win Strategy, and we’re off and running there now. As far as industrial demand and our confidence about the targets that we put out there—4 to 6% organic growth—we feel very confident about hitting those targets. We have transformed this portfolio very, very much on purpose to be able to do that. I think when you look at the durability of the short-cycle businesses right now, there are clear signs of positive short-cycle demand through orders and shipments. Both OEM and distribution short-cycle orders were positive double digits.

And this acceleration is just continuing on a broadening recovery. And as I already mentioned, we raised our forecast on Industrial & Plant and Industrial as well as Transportation to high single digits, and the rest of the market verticals remain positive. It’s very encouraging, as I mentioned at the very beginning, to see the distributor purchases really increase, and they’re driven by strong end demand. And again, as I said for a long time, the sentiment is very positive and now it is really supported not only by the orders, but by the shipments.

Jamie Cook (Analyst at Truist Securities)

Congrats again.

Jennifer Parmentier (Chief Executive Officer)

Thank you.

OPERATOR

Thanks, Jamie. We’ll go next now to Scott Davis with Melius Research.

Scott Davis (Analyst at Melius Research)

Hey, good morning Jenny and Todd. Congrats on the great start—not a good start, a great start. There’s not a lot to pick on or ask. Frankly, things are so clean. But I’m kind of curious to what extent you’re willing to share with us where Filtration Group stands today as it relates to on-time delivery, quality—kind of the key metrics that you guys obviously care about. Even if you’re not willing to share the exact numbers, some sense of where the opportunity lies I think would be helpful for us.

Jennifer Parmentier (Chief Executive Officer)

Good morning. So obviously part of the integration is integrating everything into a lot of the Parker metrics and indicators. But the thing that we’ve obviously been most focused on is safety. What’s very important to us is that people come to work every day and feel safe in their environment and that we have a culture where we’re taking care of each other and making sure everyone’s safe. That is the foundation for everything when it comes to high-performance teams, successful Kaizen events.

And that obviously, as we know, leads to taking care of the customer and growing profitably. So safety is a big focus. We’re not ready to disclose any specific numbers. I don’t know that we really ever do talk about those metrics with the acquisitions, but we will be putting them into our metrics that are really about making sure that we’re on time to the customer’s request date and that we’re continuously improving upon how we serve the customer.

These are good businesses. They have a lot of evidence of having the basics of some of the visual management that Parker Hannifin believes is key to running any operation. Again, we also see a lot of upside with the Parker Lean system and implementing all the tools in the Win Strategy.

Scott Davis (Analyst at Melius Research)

And thanks for that, Jenny, but my understanding of Filtration Group was kind of built over time with a bunch of acquisitions and bolt-ons itself. And so how heavy of a lift is it to integrate? I imagine there’s a number of different ERP systems and obviously you’re going to want to integrate it to some extent, I would think. How heavy of a lift is it overall? And then to what extent do you plan to integrate?

Jennifer Parmentier (Chief Executive Officer)

Yeah, I mean, obviously you are correct—that’s the way it was built over time. These are very decentralized, which is a positive though, because the leaders of these businesses are very used to being held accountable to their P&L statements. So that’s a positive and that feeds right into the Parker culture. So we like that about it. But none of these integrations are quote-unquote easy. I would say that there’s a heavy-lift component to each acquisition and we obviously will want to bring those together and integrate them.

And one thing to remember here too is that we’ve taken these filtration businesses and put them into existing Parker divisions. Within those leadership teams you’ll wind up with legacy Parker leaders and Filtration Group leaders. So that really does help with getting the Win Strategy ingrained into the division and bringing everybody on board with the work that needs to be done. So heavy lift, yes. But this is a core competency for us and we feel very confident about being able to integrate all these locations and really make this a successful acquisition.

Scott Davis (Analyst at Melius Research)

All right, I’ll pass it on. Thank you and best of luck.

Jennifer Parmentier (Chief Executive Officer)

Thank you.

OPERATOR

We’ll go next now to Julian Mitchell with J.P. Morgan.

Julian Mitchell (Analyst at J.P. Morgan)

Hi, good morning. Maybe just my first question around the Aerospace segment organic sales growth outlook for the balance of the year—thinking about commercial aerospace OE and aftermarket versus the same for defense. How Q1 started for those pieces, please?

Jennifer Parmentier (Chief Executive Officer)

Yeah, so if you want to just talk about the guidance for Aerospace: for the fiscal year it’s guided to 53% OE and 47% aftermarket. We did have a mix of 52—stronger commercial aftermarket than we expected. And I would tell you too, really contributing to our Aerospace Group’s ability to deliver is the team has worked very hard on demand and capacity planning in aerospace, as well as partnering with the supply chain and really investing in the supply chain over the last several years.

So this full-year guide of approximately 10%—we’re very confident about that. The initial guide being 8.5%. We are seeing commercial OEM guide remains at mid-teens growth for fiscal year ’27. Commercial transport build rates are increasing and, as we all know, aircraft demand is still greater than supply. For commercial MRO, we are raising guide to positive high-single-digit growth for fiscal year ’27. As I mentioned already, there’s an aging fleet driving aftermarket growth. We’re not seeing a lot of retirements; engine repair shop visits and component demand continues. And we’re clearly again seeing the benefits of our team really working closely with the customers, understanding what the demand is, seeing the increases come—knowing about them before they come—and making sure that we’re able to help them achieve their production rates.

On defense OEM, we’re raising the guide to high-single-digit growth for fiscal year ’27. We see strong demand for global fighter jets. The orders continued strong in the quarter, and we’re raising this guide based on firm demand from our customers. And defense MRO guide remains at mid-single-digit growth for fiscal year ’27. We’re still seeing fleet upgrades and service extensions, a focus on retrofits and upgrades as the fleet ages. And again I would say with both of these, this is a long-cycle business, but we’re raising guidance on the demand we see today and we’re focused on making sure that we serve these customers.

Julian Mitchell (Analyst at J.P. Morgan)

That’s very helpful, thank you. And then maybe just a quick follow-up on the second quarter EPS guide. I think it implies a slight, tiny decline sequentially on EPS—you know, normally that number’s up sequentially. I understand maybe some margin effect from Filtration Group beyond that. And is there something with Filtration Group where the margins in International are particularly sort of dilutive to that segment?

Todd Leombruno (Chief Financial Officer)

Yeah. Thanks so much, Julian. The mix between North America and International—I would say a full quarter of interest has got a little bit of a drag on EPS there. But, you know, we look at our incrementals—the incrementals that we’re guiding to for the total company is above 30. If you look at the legacy business, it’s much higher. The math gets a little wonky because we don’t have Filtration Group in the prior year. But I would say there’s nothing out of the ordinary other than maybe the additional interest.

Julian Mitchell (Analyst at J.P. Morgan)

Great, thank you.

OPERATOR

Thanks, Julian. And we’ll go next now to Joe O’Day with Vertical Research Partners.

Joe O’Day (Analyst at Vertical Research Partners)

Hi, good morning. You’ve made a couple references to seeing some improving demand out of the distribution channel and so was looking for a little bit more color there. I think you’ve talked for quite some time about the indications of interest being better, but actually now it seems you’re seeing that materialize some more. And so just any perspective on the growth rate you saw in North America and International out of that channel, how that compares to some of the recent quarters—just to get a better understanding of acceleration there.

Jennifer Parmentier (Chief Executive Officer)

I would say that, you know, we started to see this in Q4. We talked about it during the last call—seeing increased orders from distribution. And what we saw in Q2 was positive double digits. So we saw stronger orders in Q2. Now, I wouldn’t call this a restock—that’s not what we’re hearing from the channel. But obviously the order increase is due to real demand. They’re participating in a lot of capital investments, a lot of infrastructure, automation.

So I would say that it truly is a broadening recovery and distribution is playing very well in it.

Joe O’Day (Analyst at Vertical Research Partners)

And then on the inflationary side of things, when we think about the 200 basis point increase in organic growth guidance, any contribution to that from pricing that you’ve had to do? And then as you think about the full year, is the anticipation that price/cost is both dollar and margin positive?

Jennifer Parmentier (Chief Executive Officer)

Yeah. So, on inflation, we definitely are still seeing increases across a range of material cost inputs as well as logistics. But this is a strong muscle for us. We’re experts at managing this. Our Win Strategy and supply chain tools — they’re the best. We work closely with everybody in the organization, and with our pricing team. We’ve taken some action where we needed to. We’ll do that in the future if needed. But we are really, for the most part, back to a very normal pricing environment on the industrial side of the business.

Todd Leombruno (Chief Financial Officer)

Joe, I would say the increase in the organic growth is really demand related. It’s not price related; it’s demand related.

Joe O’Day (Analyst at Vertical Research Partners)

Got it. That’s helpful. Thank you.

OPERATOR

We’ll go next now to Brett Lindsey with Mizuho.

Brett Lindsey (Analyst at Mizuho)

Hey, good day all. I wanted to come back to the industrial margins — obviously moving structurally higher here as volume recovers and orders are picking up. You’re generating these new project wins. Is there any additional required capacity investment or reallocations in some of those divisions that would influence the path to those long-term targets?

Jennifer Parmentier (Chief Executive Officer)

You know, we’ve done a really nice job over the last couple of years of increasing capacity where we needed to. We have been able to generate additional capacity through use of Kaizen and the Parker Lean System. That’s a very strong muscle for us as well. So there is not what I would call any significant investment that will need to be made. We will continue to increase productivity, we’ll continue to use all these tools and, on a higher volume in Q1, obviously the teams were able to deliver that, and we see that that will be the case for the rest of the fiscal year and the foreseeable future.

Brett Lindsey (Analyst at Mizuho)

That’s great. And then just one more on OE within aerospace — so on Boeing and Airbus. Just wanted to better understand how much of the production rate normalization is actually in the plan versus maybe upside to the guide. What are the build rate cadence that you’re thinking about or effectively assuming in the framework?

Jennifer Parmentier (Chief Executive Officer)

Well, as I mentioned before, our teams are working very closely with these big customers, and the production rates that they’re sharing with us and the demand and capacity planning we’re doing — that’s what’s in our guidance. We don’t specifically talk about customer build rates, but we don’t expect any surprises there, and we know what their plans are. Thank you.

OPERATOR

We’ll go next now to Andy Kapowitz with Citigroup.

Andy Kapowitz (Analyst at Citigroup)

Good morning, everyone. Jennifer, Todd, maybe just focusing on the energy piece of your portfolio — it’s one of the slower-growing portions of your portfolio, even with that power gen business in there. Are you seeing any signs of life in oil and gas with the higher system energy prices and what seems like energy-security type work? Could you talk about the underlying strength of your power gen business at this point?

Jennifer Parmentier (Chief Executive Officer)

Hi, Andy. Well, you know, it is positive mid-single-digit growth, and as you know, Energy — the vertical — is about 7% of our sales. We see robust, long-cycle power gen demand — that’s been very strong. But with oil and gas, the forecast is flat. Upstream remains constrained. There’s some benefit in midstream from some infrastructure buildouts. But right now the best view we have is that mid-single-digit growth.

Andy Kapowitz (Analyst at Citigroup)

Tough one. I think, Jenny, one of the main reasons why you bought Filtration Group was its aftermarket business. It’s obviously early days in terms of your ownership, but what do they do at all differently than Parker that could help you? And then you mentioned Life Science is their biggest business — are they seeing any improvements in that business, or can you see above mid-single-digit growth in that business going forward?

Jennifer Parmentier (Chief Executive Officer)

Yeah, well, there are many reasons why Filtration Group was very attractive to us and why we had watched this business for quite some time. It’s not just one thing. It plays right into Parker’s success. But really the complementary and proprietary technology is one of those things that we look for in an acquisition, and it does expand our presence in Life Science. Life Science is an area that is growing higher than the rest of them right now. But it also brings a lot of proprietary media for markets that we already play in.

So this is a good-performing business that we’re going to improve upon, and we think that there’s plenty to learn here. I would say it’s still early days about learning all of how they go to market and how they handle their channels, but we think that we can learn from that, and we also think that there are some things that we do that might fit well within Filtration Group. Thanks, Andy.

OPERATOR

We’ll go next now to Steve Tusa with Wells Fargo.

Steve Tusa (Analyst at Wells Fargo)

Hey, thanks for taking me in. Appreciate it. I guess any sort of color on — I know you don’t disclose price — but any directional color on how that may have impacted the incrementals? I mean, is it neutral to margin? Just any kind of high-level color on the price-cost situation?

Todd Leombruno (Chief Financial Officer)

Yes, Steve, I’ll start. If Jenny’s got anything to add, I’ll let her go. There’s really no impact on the incrementals from price. This is something Jenny mentioned earlier — this is something we do all the time. We try to remain margin neutral, so there are no levers that we’re pulling to try to make it so that we’re improving our incrementals on that. The result was based off great demand, great volumes, and unbelievable execution across every single one of our businesses.

Steve Tusa (Analyst at Wells Fargo)

Yep, yep, yep. And then, just on the meeting, Jenny, I think you said — I mean, you said expect some news. I know it was kind of cryptic.

Jennifer Parmentier (Chief Executive Officer)

I exchanged my words around. I said we’ll have some news for you.

Steve Tusa (Analyst at Wells Fargo)

Okay, but I mean, obviously you guys seem like you’re — you know, like the long-term targets can be reset. Is there any thought or consideration to a more holistic portfolio evaluation from that perspective?

Todd Leombruno (Chief Financial Officer)

You know, Steve, I wouldn’t go that deep. I would say, hey, you know, it’s a few months out from now. We obviously just closed Filtration Group. We will have closed Circor by the time that comes. The company will be over $25 billion in total revenue. We’re going to give you some color on what the company looks like today and what we’re planning on doing over the next five years.

Jennifer Parmentier (Chief Executive Officer)

Well said.

Steve Tusa (Analyst at Wells Fargo)

Okay, perfect. Had to ask. Thanks a lot.

OPERATOR

Thank you. We’ll go next now to Varun Govindaraj with Bernstein.

Varun Govindaraj (Analyst at Bernstein)

Good morning, everyone. Thank you for the question. Linked a little bit to what we just talked about: as you continue to get larger, do you see a big enough pipeline of complementary M&A assets out there that can materially move the needle like Meggitt and Filtration Group are expected to, or should we think about this as more bolt-ons going into the future?

Jennifer Parmentier (Chief Executive Officer)

So, Varun, there are deals — assets of all sizes — in the acquisition pipeline. One of the things that we often talk about is making sure that pipeline stays active and healthy, and that’s something that we’ve done for quite some time. Most of the time we’re not in control of the timing of those, but we do believe that the pipeline is still robust and that there are assets out there that are interested.

Varun Govindaraj (Analyst at Bernstein)

Appreciate the color. And then just to follow up, could you remind us on backlog conversion — in general, how much of that tends to convert to revenue over the course of the next 12 months? And should we expect any changes there, just given the shift in mix of the business?

Todd Leombruno (Chief Financial Officer)

We don’t expect changes in the conversion rate over the next year or so. It’s roughly 75% over a 12-month period. But, you know, there’s always a lot of move-ins and move-outs there. That’s not something that we really look at when we’re looking at it — it’s roughly 75%.

Varun Govindaraj (Analyst at Bernstein)

Appreciate the color. Thank you. I’ll pass it on.

Todd Leombruno (Chief Financial Officer)

Thank you. Hey, Bo — this is Todd. I think we maybe have time for one more today.

OPERATOR

Understood, Mr. Leombruno. We’ll take that final question today from Jeff Hammond of KeyBanc Capital Markets.

Jeff Hammond (Analyst at KeyBanc Capital Markets)

Hey, good morning everyone.

Jennifer Parmentier (Chief Executive Officer)

Good morning, Jeff.

Jeff Hammond (Analyst at KeyBanc Capital Markets)

Maybe just last one on Filtration Group. A lot of good color there, Jenny. And I know you don’t include revenue synergies, but as you look at the portfolio early on, just any clear opportunities — whether it be distribution complements, market complement, geographic — where there are some clear revenue synergies to think about? Thanks.

Jennifer Parmentier (Chief Executive Officer)

Jeff, you’re right, we don’t model any revenue synergies. But we are definitely seeing areas of opportunity — areas where we can leverage Parker technologies to Filtration Group customers and then leverage Filtration Group technology to Parker customers. The integration team, although they’re focused on integrating the businesses and achieving the synergies, our sales and marketing teams are working closely together to identify those opportunities, and we definitely believe that there are some there.

Todd Leombruno (Chief Financial Officer)

Yeah, Jeff, we also have — real early days here — but we found some capacity opportunities where we’ve been able to utilize existing filtration capacity within our legacy businesses to help some of those Filtration Group businesses. That was discovered early on — like three weeks in — and there’s a lot there.

Jennifer Parmentier (Chief Executive Officer)

Super hap